Ally Financial rapidly expanded its electric vehicle leasing business after receiving a 50% residual value guarantee from an unspecified automaker during the first quarter.
Ally, one of the nation’s largest auto lenders, said July 17 that it financed $1 billion in loans and leases for new electric and plug-in hybrid vehicles during the second quarter — more than double the $347 million it financed a year earlier and a 39% increase from the first quarter.
Leases, not loans, have been driving EV and PHEV growth. Ally said it wrote $639 million in EV and PHEV leases during the second quarter, more than tripling from $174 million a year earlier. EV and PHEV loans more than doubled from $173 million to $366 million during that period, according to a second-quarter investor presentation.
EVs accounted for 83 percent of Ally’s $639 million in leasing volume in the second quarter. A year earlier, they weren’t in the portfolio; Ally leased only plug-in hybrids.
“This increase in volume is another example of how our automotive business is well positioned for an evolving automotive landscape,” Ally CFO Russ Hutchinson said during the July 17 earnings call. “We are pleased with the risk-adjusted returns we are realizing in the channel, particularly with residual value protection.”
Hutchinson said Ally reached a residual value guarantee with an automaker in March. Ally did not provide the name of the automaker to Automotive News.
“Virtually all of our battery electric vehicle leases come with residual OEM warranties,” Hutchinson said on the earnings call.
Ally said in a first-quarter government filing that the company entered into the agreement with the automaker during the period and indicated that the manufacturer was guaranteeing 50 percent of the vehicle’s contract residual value. The filing also did not specify the name of the automaker or the type of powertrain.
A previous deal with an automaker — it wasn’t clear whether it was the same company or whether it also involved electric vehicles — guaranteed Ally 15% of the list price.
The previous agreement did not generate the same type of leasing volume seen in the new agreement.
Ally had $43 million in leased vehicles guaranteed at 15% of the sticker value during the first quarter of 2023, $30 million with that protection during the second quarter of that year and $12 million at the end of 2023.
In the first quarter of 2024, Ally had $272 million in leased vehicles with one of the two guarantees — nearly six times more than the year before — and all but $8 million of that was tied to the 50% residuals promise.
In the second quarter, Ally nearly tripled that amount to a portfolio of $776 million in leased vehicles with any collateral — with all but $3 million collateralized at 50% of residual value.
Lease agreements divide the cost of the vehicle and the lender’s profit margin into a series of monthly payments and a fixed-sum residual value. At the end of the lease (three-year terms are common), the consumer can either purchase the vehicle for the residual value or return it to the lender, who then has a used vehicle on its books.
Ideally, the lender could sell the vehicle and recover all of the residual value—or even more, as happened during the shortage—and break even or make a profit. But if the residual value is too high, the lender could lose money on the deal.
This excess residual value could be intentional—an automaker, for example, might have inflated residual values to give the lessee lower monthly payments—or unintentional, a failure to anticipate the used-vehicle market at the end of the lease. Recently, aggressive sticker-price cuts by automakers have caused used EV prices to plummet—potentially a problem for any lender drafting leases based on old EV values.
Residual value guarantees provide some peace of mind by putting a floor on potential losses. Hutchinson said during the earnings call that Ally’s EV guarantees gave it “significant protection against value declines.”
The $12 million increase in secured leases to $776 million in two quarters suggests Ally bought and leased thousands of electric vehicles from the unnamed manufacturer during the first half of the year.
Among the automakers that Kelley Blue Book data indicated for the first half of 2024 had high EV sales or models with lower EV volume but higher sticker prices were Ford, General Motors, BMW, Mercedes, Toyota, Kia, Nissan and Lucid — all of which said they had no such program with Ally. Volkswagen, Audi, Volvo and Polestar did not respond to emailed questions left in mid-August.
A Hyundai spokesperson said he had no corporate knowledge of an Ally collaboration with Hyundai or Genesis. Rivian’s latest quarterly government filing describes it as offering a warranty only for an unspecified number of vehicles leased to Chase Auto, its white-label captive financing partner.
EV market leader Tesla did not respond to an emailed inquiry in mid-August. But it appears to have significantly increased its residual warranties during the first half of the year.
In a second-quarter government filing, Tesla reported a maximum exposure of $807 million in residual value guarantees to “commercial banking partners” at the end of June — up from $166 million at the end of 2023. It said its obligation applies if lenders are “unable to sell the vehicle at or above the contractual residual value at the end of the lease term.” But it called the liability for those guarantees “immaterial” at both the end of the quarter and the end of the year.
According to Ally, the bank makes the same profit on EV leases as it does on internal combustion engine leases because of the $7,500 tax credit available to those who buy EVs for business use. The bank shaves $7,500 off consumers’ lease payments, which makes EVs cheaper to lease than gasoline-powered models, but it also collects a $7,500 tax break, which reduces its own taxes, according to the investor presentation.
Ally explained the concept with a hypothetical 36-month EV lease written while the bank experienced a 21% tax rate. Under this scenario, Ally subsidizes the lease by $2,500 each year of the roughly three-year lease, but collects a $6,500 tax benefit in the first year, then a $500 tax break in Year 2 and again in Year 3, and comes out even.
Hutchinson said Ally’s electric vehicle leasing revenue is smaller than its internal combustion engine (ICE) vehicle leasing revenue, but it’s not a significant amount.
“Strong EV lease originations generated over $90 million in EV tax credits in the period, resulting in a negative tax rate for the [second] “We expect the momentum we’ve seen in EV leasing to result in a negative tax rate for the year.”